Accessibility links

East: Economist Posits Link Between Farm Reforms And Democracy

  • Ron Synovitz

The latest report by the European Bank for Reconstruction and Development, which was released this week, features a special section on the link between agricultural reform and democracy. RFE/RL correspondent Ron Synovitz spoke to the EBRD's chief economist, Willem Buiter, about the report.

Prague, 29 November 2002 (RFE/RL) -- The degree to which agricultural reform has taken place in the former communist bloc is related to the extent of democratic reform in each country and the power of vested interests to hold back reforms.

That is the finding of a report on economic transition that was released this week by the European Bank for Reconstruction and Development.

EBRD Chief Economist Willem Buiter, who played a key role in preparing the bank's latest Transition Report, spoke with RFE/RL about the findings. He says the study suggests there is a correlation between agricultural reform and genuine democratic reform.

"The strong relationship was in a sample between the size of the agricultural sector -- measured by employment especially -- and the degree of progress along the road of transition. There also is a very strong relationship across our 27 countries of operations between how a country has done economically in terms of fundamental reforms, restructuring and growth -- and the strength of its commitment to political pluralism, democracy, and human rights. So, indeed, you see unreconstructed agricultural goes together with unreconstructed politics. And the other way round."

The EBRD's assessment on agricultural reforms is shared by groups like the Paris-based Organization for Economic Coordination and Development (OECD). Both the EBRD and the OECD say that the "vested interests" of agriculture from the communist-era often have strong representation in postcommunist governments.

Buiter says vested interests "include everybody who has an interest in the present state of affairs. In the context of vested interests resisting reform, we are mainly thinking about the large collectives. The linear descendent of the mass of very large state agricultural enterprises -- what you would call the Soviet kolkhoz and sovkhozs (collectives and state farms)."

Buiter explained that the "vested interests" often use their influence over the lawmaking process to resist market reforms that might threaten them.

"These [vested interests] have no interest in having their holdings transformed into agricultural freeholds with a very active land market and free access for procurement and sales by independent agricultural producers. [It is] the old survivors of the Soviet agricultural establishment. They are the vested interests we are referring to there."

Buiter went on to name three countries with poor records on agricultural reform as well as economic and democratic reforms.

"In some countries, agricultural reform hasn't started yet. In Belarus, Turkmenistan, Uzbekistan, we have seen very, very little agricultural reform."

For much of the last decade, agricultural production has declined in countries that are lagging on reforms. During the early and mid-1990s, governments in those countries often blamed declining agricultural production on poor weather conditions rather than on their own poor reform records.

Buiter says that the underreporting of production levels at large collective farms also has contributed to the declining output. He said such underreporting is symptomatic of economic policies that encourage the growth of what Buiter calls the "informal sector" -- the black market.

"We see in the presence of overregulation, or government procurement at prices that are way below what can be fetched in the more or less open markets [nearby], that the informal sector grows when the state or other predators clamp down on the agricultural sector. And there is no doubt that agricultural production is being understated."

Buiter explained that when governments force farmers to sell their produce to the state at prices that are below the international market value, and when only the vested interests with close links to the government are granted a license to export crops, farmers are discouraged from growing more crops or investing in equipment that would improve their output.

"Low procurement prices and the incentive to hide crops and produce from government inspectors are part of the story of the reported decline. But I also think that in many of the regions there has been a real decline. And some of that real decline was absolutely necessary because, talking mainly about the former Soviet Union, agriculture was greatly overexpanded."

Buiter said the former Soviet republics of Central Asia are good examples of where agriculture expanded too much during the Soviet era. And he says a partial decline of production in those countries has been necessary.

"We have these vast environmentally disastrous cotton plantations in the middle of Central Asia, much of which is not economically viable. That was maintained because it was massively subsidized under the Soviet Union. That subsidy capacity is no longer there in the successor states. So some of the decline of agricultural production is real. And it reflects a necessary reduction in the scale of operations that had grown to an uneconomic and environmentally damaging point."

But the EBRD economist says much of the agricultural decline seen in the last 10 years can also be attributed to government policies that drain money from the sector rather than encourage growth.

"Of course, there is also a decline that reflects overtaxation of the sector. The former Soviet republics, rather than subsidizing agriculture the way they do in the West, almost uniformly tax agriculture explicitly and implicitly through low procurement prices, expensive inputs from monopolized sources, and all kinds of other ways of extracting surplus for the cities, where the elite are, from the countryside."

Buiter says that the privatization of agricultural land, in itself, is not enough to foster greater farm production. He says it also is important for private farmers to be able to use their land as collateral for short-term loans, and indeed, to have access to agricultural loans.

"It is very important. The methods and modality of land privatization matter. And also, the subsequent regime for trading property rights in land. If you simply privatize land in equal amounts per head of the existing collective farm labor force, but you do not permit free trading of land or free land leasing to get consolidation of plots into reasonable economic size, then all you would get is a collection of undersized peasant plots. So the means of privatization [is important], but also an active land market permitting the purchase and sale of the whole gamut of normal property rights and the use of land. That's a key."

Buiter named Russia as an example of a country that has only recently passed the kind of laws needed for the privatization of agricultural land.

"Russia is finally beginning with agricultural land reform. It has taken a long time, and only just this year has the law been passed."

The EBRD economist rejected the argument, often used by vested interests opposed to privatization, that foreigners will inevitably buy up the best agricultural land.

"The same argument is made about privatization in general -- that the crown jewels are being given away cheaply to rapacious foreigners with deep pockets. And there is some truth to that because ready access to cash and other resources to make effective bids are more easily found in London and New York than the Upper Petrovsk. But at the same time, we shouldn't exaggerate this. The people who make these points and want to keep rapacious foreigners out of the domestic land market are rapacious locals who want to get their hands on it. So there are powerful domestic interests who don't want the competition of foreign financial clout because they want to get the assets cheaply, and presumably, turn around and sell it later to the foreigners that they didn't want to [buy it up] in the first place."

Buiter says the root of the problem is simply that governments treat the agricultural sector differently from other sectors. Thus, agricultural reform and rural issues have not featured prominently in reform programs during the first decade of postcommunist transition.

"There is need for turning the agricultural sector into much more of a normal market sector rather than some sector or service industry for which different rules of the game apply. The same rules and incentives that motivate economic agents everywhere also work for farmers."

Buiter said that if foreign domination of land purchases really is an issue, governments could easily protect domestic farmers by restricting the free land market to its own citizens.

He concludes that there must be an effective secondary land market in order to encourage private farming on a scale larger than garden plots.

He said Ukraine is an example of a country where farmers respond quickly to financial incentives. He said that when the state or vested interests have a monopoly on the sale of fertilizers and credits, as well as the prices that farmers receive for their crops, the natural inclination of farmers is to cut back production.

But he says that production increases, notably when farmers are able to purchase fuel, seed and agri-chemicals at competitive prices -- and to sell their crops at prices close to that on the international market.